There are many factors to consider when starting a business and one that can be overlooked is your business credit score. Like a personal credit score, a business credit score indicates your business’s creditworthiness and influences your access to credit products like credit cards and small business loans. Your business credit score indicates how financially healthy and reliable your business is, making other vendors or credit agencies more likely to work with your business. It gives vendors insight into how your business handles debts and the likelihood of making payments on time. The higher your score is, the more favorable terms you’ll be able to secure for your business. Business credit is separate from an individual’s personal credit score, and both are often considered when applying for a loan for your business.
In this article, we’ll dive into how to calculate your small business credit score, how to establish your business credit score, and how to understand your business credit.
Calculating your business credit score
A business credit score is calculated differently than a personal credit score. A business credit score is generally measured on a scale of 1-100, with a higher number being more favorable. While there are three credit reporting bureaus, Dun & Bradstreet is most commonly used in a business credit check. Dun & Bradstreet collects different information regarding a business including payment history and financial information to calculate three business credit scores. These scores represent three different areas of financial health: payment history, financial stress, and commercial credit.
PAYDEX credit score: This score indicates the payment history of a business and how regularly a business makes payments to vendors early or on time. It’s on a scale of 1-100 with a higher score indicating strong payment performance.
Financial stress credit score: This score calculates the likelihood a business will remain in business in the next 12 months. Lenders and external vendors use this score to assess the risk of doing business with a company and how likely it is to succeed in the next year.
Commercial credit score: This score measures a business’ bill delinquency, which refers to how likely a business is to pay bills past 91 days. This score also predicts the chance of a business needing to apply for legal relief.
Building your business credit
Strong business credit ensures your business has access to opportunities when you need them – like increasing your likelihood of getting approved for a loan when you need one. But, when you’re just starting out your business, you’re starting your business credit from scratch. Establishing your business credit can take some time, but with the right strategy you can be set up for success when just starting your business or rebuilding your business credit. To get your business started on the right foot, follow these eight steps to build your business credit for success.
Register your business and get an EIN
The first step to establishing business credit is to register your business. This process varies by state, but generally you must register your business with the state it will operate in. You should also apply for an employer identification number or EIN, with the IRS. The EIN is a business tax ID required by the IRS for most businesses.
Apply for a DUNS number
There are three major business credit reporting bureaus: Experian, Equifax, and Dun & Bradstreet. To get a business credit score from Dun & Bradstreet, you need a DUNS number. Lenders and other agencies often use this unique nine-digit number to easily look up your business credit score. Federal grant applications also require this number. A DUNS number can be requested for free on the Dun
& Bradstreet website.
Open a business credit card
Just like with a personal credit card, a business credit card is one of the best ways to establish business credit. By making regular, on-time payments and keeping the balance less than 30% of your available credit, you can establish good business credit.
Your personal credit score is used to determine approval for a business credit card, so you can apply for a business credit card without established business credit.
Establish trade lines
Vendors often extend trade credit, which is a type of accounts-payable relationship where you can pay several days or weeks after receiving inventory. It can help boost your business credit score if the vendor reports payments to a business credit bureau. If a vendor doesn’t report to a credit bureau, you can still list them as a trade reference on your account and Dun & Bradstreet will follow up to collect your trade information. This means you can set up trade lines with any small vendor, whether it’s your office supply distributor or water supplier.
Make early payments
Payment history is the most important factor in calculating your business credit score. While you should always make on-time payments, early payments are even better. A history of making early payments will reflect well in your credit score. Dun & Bradstreet assigns perfect PAYDEX scores – which measures a business’s payment history – to companies that consistently pay early.
Work with lenders that report to credit bureaus
Small businesses use lenders for extra funding for a variety of reasons. Whether you’re expanding or just simply need extra capital, ask the lender if they report to a credit bureau before you take out a small business loan. However, a small business loan will only positively affect your business credit score if you make payments on time and repay the loan according to the loan agreement. Make sure you are taking out a loan you can afford to repay when applying for funds.
Banks typically report to credit bureaus, but often only lend to businesses with established high credit. Alternative lenders are more accessible for new businesses, but not all of them report to credit bureaus. Ensure your business has the best chances for loan approval by following our tips. Consider what option works best for your business when deciding what type of lender to pursue.
Avoid judgements and liens
Perhaps this goes without saying, but try to avoid judgements or liens against your business. Unpaid taxes or debts can result in a lien and negatively impact your credit score. These negative marks can dramatically impact your business credit score.
The best way to stay in good credit standing is to ensure your business stays within its means – don’t apply for loans you don’t know how to repay or rack up credit card charges you can’t pay. Keep up with monthly payments for your business credit card and if you need additional funding, work with a specialist to determine what is feasible for your business needs.
Monitor your credit score
The last step to establish and maintain good business credit is to regularly monitor your business credit score. It’s a good idea to regularly check your business credit score across all three credit bureaus – Experian, Equifax, and Dun & Bradstreet – to ensure all are up-to-date and free of errors.
Advantages of having good business credit
There’s a reason why you go to all this work to have good business credit. Similar to having a high personal credit score, a strong business credit score gives your business access to better financing terms. A business with a strong credit score is more likely to get approved for a loan, and that loan will come with better terms than a loan for a business with poor credit. Additionally, other suppliers and vendors may agree to better terms. Having strong credit acts as a bargaining chip and proves to vendors you’re trustworthy.
A good business credit score also helps separate your business and personal finances. Small business owners typically invest a lot of their personal assets into a business when just starting out, and having established business credit will eventually help the separation of finances. Keeping your personal finances separate from your business finances helps protect both entities, especially when applying for a loan.
Ultimately, your business credit score reflects the financial health of your business. While every business has its ebbs and flows, having a solid foundation and financial habits will keep your business running smoothly. These strategies will not only lay the groundwork for business credit, but help you create a sustainable and stable company.
About the Author
Kelly Hillock is the content marketing manager for SmallBusinessLoans, where she writes and edits articles for small business owners. Kelly has over eight years’ experience in copywriting across a variety of industries, focusing on entrepreneurship and finance. She has a Bachelor of Arts in journalism from San Diego State University.